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C142 Ownership changes Dissolution - the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business

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C143 Ownership changes, continued Changes may suggest: The existing assets of the original partnership should be revalued; Previously unrecorded intangible assets exist that are traceable to the original partnership; and/or Intangible assets, such as goodwill, exist that are traceable to a new partner

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C144 Admission of a new partner Accomplished by either A contribution of assets to an existing partnership –either the bonus or goodwill method of accounting is employed A contribution of assets to an existing partner –generally a transfer of book values from one partner to another

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C145 The value of assets contributed to an existing partnership unrecognized appreciation on recorded net assets and/or unrecognized goodwill May be in excess of that suggested by the book value of the original partnership’s net assets which suggests that the partnership may have

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C146 The value of assets contributed to an existing partnership, continued suggests unrecognized depreciation or write- downs on recorded net assets of the original partnership and/or additional intangible assets being contributed by the incoming partner May be less than that suggested by the book value of the original partnership’s net assets

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C148 The bonus method Total capital of new partnership is: The book value of the previous partnership – Any write-downs in the value of the previous partnership’s net assets + The value of the consideration paid to the partnership by the incoming partner Note: only net asset write-downs (versus write-ups) are recognized

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C149 The bonus method, continued New partner’s initial capital balance equals the percent interest in the capital of the new partnership Bonus may be either to old partners or the new partner Bonus is allocated based on profit/loss percentages, not interest in capital percentages

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C1417 The goodwill method Total capital of new partnership is: The book value of the previous partnership  Unrecognized appreciation or depreciation on the recorded net assets of the previous partnership + Unrecognized goodwill traceable to the previous partnership + The value of the consideration, both tangible and intangible, received from the new incoming partner

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C1418 The goodwill method, continued Both net asset write-downs and write-ups are recorded New partner’s initial capital balance equals the percent interest in the capital of the new partnership Goodwill may be traceable to the original partners and/or the new partner

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C1419 Identifying and measuring goodwill traceable to the previous partnership 1. Calculate the value of the partnership suggested by the incoming partner (incoming partner’s contribution divided by the percent interest in capital acquired) 2. Adjust the book value of the original partnership for any unrecognized net asset appreciation or depreciation (continued...)

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C1420 Identifying and measuring goodwill traceable to the previous partnership (... continued) 3.Calculate adjusted book value of original partnership plus investment of new partner 4.If 1. above is greater than 3. above, goodwill exists and is traceable to the original partners 5.Goodwill is the difference between the value in 1. above and the value in 3. above

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C1421 Goodwill traceable to the previous partnership Facts. A and B are original partners with a partnership net book value of $200,000. Recorded net assets have a fair value of $220,000. Profit/loss percentages: A = 60%, B = 40%. C acquires 20% interest in capital for $70,000 cash

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C1425 Identifying and measuring goodwill traceable to the new partner 1.Calculate the value of the partnership suggested by the incoming partner (incoming partner’s contribution divided by the percent interest in capital acquired) 2.Adjust the book value of the original partnership for any unrecognized net asset appreciation or depreciation (continued...)

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C Calculate adjusted book value of original partnership plus investment of new partner 4.If 1. above is less than 3. above, then goodwill exists and is traceable to the new partner (continued...) Identifying and measuring goodwill traceable to the new partner, continued

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C Goodwill is the difference between a) The amount that should have been paid by the new partner, as indicated by the adjusted book value of the previous partnership [(adjusted book value of the original partnership  total percentage interest of the original partners in the new partnership) – the adjusted book value] and b)The amount actually paid by the new partner Identifying and measuring goodwill traceable to the new partner, continued

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C1428 Goodwill traceable to the new partner Facts. A and B are original partners with a partnership net book value of $200,000. Recorded net assets have a fair value of $220,000. Profit/loss percentages: A = 60%, B = 40%. C acquires 20% interest in capital for $45,000 cash

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C1430 Analysis, continued The amount that should have been paid by the new partner: $55,000 [($220,000  80%) – $220,000] Goodwill traceable to the new partner: $10,000 ($55,000 - $45,000) Goodwill traceable to the new partner, continued

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C1432 Contribution of assets to existing partners Generally, a portion of the selling partner’s book value of capital is transferred to the buying partner Example: The book value of B’s capital interest is $50,000. C acquires one-half of B’s capital interest for $30,000: B, Capital25,000 C, Capital25,000

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C1433 Withdrawal of a partner Withdrawing partner may sell interest to the partnership and/or an individual partner

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C1434 Selling of an interest to the partnership The bonus or goodwill method may be employed The bonus method will only recognize net asset write-downs (versus write-ups)

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C1435 Selling of an interest to the partnership, continued If the goodwill method is used generally only net unrecorded appreciation and/or goodwill traceable to the selling partner is recognized net asset write-downs should be recognized to the extent that they are traceable to the whole entity

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C1436 Partnership liquidation guidelines The UPA establishes rules governing the priority in which partnership assets are distributed The doctrine of “right of offset” combines loans due to partners with the capital balances of partners The liability for debit capital balances is covered by the doctrine of “marshalling of assets”

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C1437 Partnership liquidation guidelines, continued If debit capital balances are not eliminated, they are allocated to the other partners with credit capital balances All attempts should be made to avoid premature liquidation payments to partners

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C1440 Types of liquidation approaches Lump sum liquidation - all assets are in a distributable form and all outside creditors are satisfied before distributions are made to partners Installment liquidation - payments may be made to partners in installments rather than in a final lump sum. Caution must be exercised to insure that no premature distributions are made

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C1441 Types of liquidation approaches, continued A predistribution plan - developed in advance of actual distributions which serves as a guideline for the order and amount of future distributions

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C1442 Installment liquidation guidelines The “right of offset” doctrine is employed All liabilities, possible losses, and liquidation expenses are anticipated Prior to a distribution, all remaining non-cash assets are assumed to be worthless

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C1443 Installment liquidation guidelines, continued With respect to potential debit capital balances, all partners are assumed to be personally insolvent Actual distributions are based on a schedule of safe payments or a predistribution plan

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C1444 Installment liquidation

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C1445 Installment liquidation

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C1446 Predistribution plan Based on how much loss a partner could absorb (i.e., maximum loss absorbable, the MLA) MLA = partner’s capital balance  partner’s profit and loss percent Partner with the largest MLA is the strongest and should be the first to receive a distribution

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C1447 Predistribution plan, continued Actual distributions reduce partners’ capital balances and their respective MLAs When all partners have equal MLAs they will all receive a distribution